Paying for Performance in Public Pension Plans
Forthcoming, Management Science
68 Pages Posted: 18 Feb 2021 Last revised: 18 Mar 2022
Date Written: February 8, 2021
We examine the relation between public pension plan Chief Investment Officer (CIO) compensation and plans’ investment performance. Higher paid CIOs outperform their counterparts by 47 – 60 bps per year, largely through increased and superior investment in private equity and real estate. This outperformance generates an additional $74.91 – $95.63 million in economic value. Plans offering higher compensation hire better educated CIOs and are more likely to retain their CIOs. Higher CIO compensation is positively correlated with the use of incentive compensation, but incentive compensation does not directly affect performance. Demand- and supply-side frictions help explain the variation in CIO pay and the persistent low compensation paid by some plans despite the positive relation between compensation and performance.
Keywords: Public pension fund performance, compensation, incentives
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